SINGAPORE (Mar 8): UOB Kay Hian is initiating coverage on Koufu Group at “buy” with a target price of 95 cents, which implies a 41.8% upside to its last close of 67 cents.

The move comes on UOB’s belief that the counter is deeply undervalued based on 18.1 times FY19F P/E, and pegged to a 10% discount to peers’ average.

In a Friday report, analyst Yeo Hai Wei highlights Koufu as “a steal” at current valuations for a company with solid niche leadership in a potential high growth, high margin business, in his view.

He also likes the group as a “defensive cash cow”, backed by strong brands and its leading market position in the highly-defensive food court and coffee shop businesses.

“We believe the market has overlooked key growth vectors with regard to Koufu’s expansion plans while concerns over headwinds in the food court business are overblown… More analyst coverage and a longer listing track record should help Koufu to rerate upward,” says Yeo.

In particular, he estimates net profit could grow at double-digit levels from 2019 as opposed to consensus expectations for net profit to remain flattish from 2018-2020.

“Koufu is on a steady path of growth as management completes the enhancement initiatives of Rasapura Masters (Rasapura) and has a pipeline of five new food courts in 2019. In addition, we expect a faster roll-out of Koufu’s R&B Tea and Super Tea which are highly popular with the younger crowd. Beyond Singapore, management has identified Macau as a key overseas expansion springboard,” elaborates the analyst.  

See: Koufu in expansion mode to diversify revenue streams

Should the group sell its two central kitchens at 18 and 20 Woodlands Terrace, Yeo believes the eventual sale of these properties could bring in $10 million and unlock gains of up to $8 million, which he thinks should further bump up dividends.

“[Koufu’s] outlet and mall management business has seen consistently high occupancy of at least 93% in the last three years. Koufu intends to distribute at least 50% of its profits for 2018 and 2019, which is sustainable given strong cash flow generation. This could translate into a potential dividend yield of 3.9% for 2019,” he adds.

As at 11:39am, shares in Koufu are trading flat at 67 cents or 3.7 times FY19F book value.